The 0.25% rise in the Swiss National Bank’s target Libor (London inter-bank offer rate) range is awkward for the US Federal Reserve. Wall Street expects a Federal funds rate cut of 0.50% on 18 September, but other central banks are raising rather than lowering rates. With global commodity prices rising inexorably, Fed chairman Ben Bernanke may be torn between domestic priorities and the need to ward off inflation caused by international rate disparities.

The domestic case for a rate cut is superficially strong. Employment unexpectedly dropped in August, suggesting that the Fed’s primary target of full employment may be endangered. Core inflation has dropped close to the Fed’s 2% target. The disruption in the asset-backed commercial paper market removed $238 billion (Rs9.6 trillion) from the financial system in six weeks, the knock-on effects of which have raised Libor rates around the world well above official targets. A rate cut could also stabilize the US housing market, which is dangerously close to meltdown.

Central bankers outside the US see a different picture. They believe that “core" inflation, which excludes rising energy and commodity prices, is not representative of the true cost of living. They see a world economy with record growth and with stock markets close to historic levels, including in the US. The ABCP (asset-backed commercial paper) meltdown has sucked out liquidity and raised the Libor rates, but they believe that can be addressed by direct capital injections rather than rate cuts. Meanwhile, the behaviour of commodity, energy and shipping prices strongly suggests that supply bottlenecks are straining world economic capacity.

Both views could be right—in closed economies. Yet the declining dollar, which divergent central bank rate policies may well exacerbate, may soon produce higher US inflation. Also, price pressures are increasingly arising from goods and services produced in China and India, where inflation is accelerating. Even core US inflation cannot remain quiescent much longer.

The Fed has maintained an over-accommodative monetary policy since 2002—or, arguably, since 1995. That limits its flexibility now. It may find that Wall Street’s longed-for rate cut on 18 September produces a surge in inflation, forcing it to reverse policy. That could be more painful than standing pat now.